Greece’s budget deficit worse than predicted

The likelihood of Greece seeking financial support from eurozone governments and the International Monetary Fund increased today as new data showed that the country’s budget deficit in 2009 was worse than predicted.

Figures released today by the EU’s statistical office, Eurostat, put the Greek deficit at 13.6% of gross domestic product (GDP), higher than the 12.9% predicted by George Papaconstantinou, Greece’s finance minister.

Eurostat said that the figure could rise to more than 14%, as it is still investigating deals between the Greek government and investment bank Goldman Sachs that are alleged to have been used to conceal the true state of the deficit. It said this could lead to the deficit being revised upwards by as much as half a percentage point.

Eurostat’s announcement pushed the interest charged by investors to hold Greek ten-year bonds up to 8.56%, the highest level since Greece joined the eurozone. The yield is 540 basis points higher than that charged on German bonds, the benchmark rate for euro-denominated bonds.

Officials from the European Commission, International Monetary Fund and European Central Bank today began a second day of technical discussions with the Greek government on the conditions that would apply to Greece activating a €45 billion emergency loan facility. The facility would be financed by the IMF and eurozone governments.

Finance ministers agreed to create the facility during an emergency teleconference on 11 April because of concerns that Greece would not be able to afford to refinance its debt because of the high interest rates that markets were demanding. The facility would provide Greece with loans at rates considerably below what it is now paying on the markets.

The Greek government requested the start of technical discussions on 15 April, as a preparatory step to potentially activate the loan facility. There are increasing doubts among investors as to whether Greece will be able to repay a €8.5bn bond that matures on 19 May, meaning it will have to either seek financial support or restructure its debt if it is to avoid default.

Papaconstantinou said this week that Greece could, in an emergency, request activation of the mechanism even before the discussions (expected to last 2-3 weeks) are completed.

Olli Rehn, the European commissioner for economic and monetary affairs, said that the figures “underline the urgency [for Greece] to intensify the preparations of structural reforms and additional measures for the coming years”.

He said that Greece was still on course meet a target, agreed with the EU, to reduce its deficit by four percentage points of GDP in 2010. A spokesperson for Rehn said that the Commission and finance ministers would assess Greece’s progress in consolidating its budget in June. Greece has said it will bring its deficit to within 3% of GDP by 2012.

The Eurostat figures show that Greece had the second largest deficit in the EU in 2009, behind Ireland on 14.3%, and ahead of the United Kingdom on 11.5%. The lowest deficit (0.5%) was recorded by Sweden. No government achieved a government surplus.

Greece was not alone in suffering a sharp hike in its deficit. Eurostat said that Portugal, another country whose poor public finances are worrying markets, had a deficit of 9.4%, compared to 8% in the Commission’s latest economic forecast, published in November.

The overall EU government deficit was 6.8% in 2009, close to the 6.9% predicted by the Commission in November. The overall eurozone deficit was 6.3%, compared to 6.4% in November.

Rehn cited Eurostat’s doubts over the Greek figures as evidence that the office should be given “audit-type powers”. The Commission made a legal proposal on this in February. “I call on the Council of Ministers and European Parliament to adopt the relevant legislation to this end without delay,” Rehn said.